Vijaya Bank
Focus on profitability; initiate with Buy
We initiate coverage on Vijaya Bank with Buy and price target of
`107/share. We expect prudent business growth and improving
liability mix to support the expanding core income. The Bank is
likely to register 23.4% earnings CAGR over FY10-13e, driven by
higher NIM and improved productivity.
Prudent business growth; higher NIM. We expect Vijaya Bank
to grow its business in a prudent manner (19.8% CAGR over
FY10-13e) with greater emphasis on higher-yielding loans. NIM
expansion to 2.8% in FY13e from 2.3% in FY10 will be led by
altered liability mix – higher CASA share and lower wholesale
deposits.
Improving productivity. Focus on enhancing employee skills
and technology would help boost productivity. We expect cost-toincome
to improve to 48% by FY13e from 49.8% in FY10,
despite branch expansion and additional provisions (which were
on account of higher gratuity and pension).
Asset quality concerns allaying. GNPAs have steadily declined
over the past three quarters, from 2.94% in 1QFY10 to 2.32% in
1QFY11. We expect current capital infusion of `7bn (CAR:
14.7%; tier-1 capital: 10.1%) to support future growth and
adequately capitalise the Bank for additional loan defaults.
Valuation and risks. At our target price of `107, Vijaya Bank
would trade at 1.5x FY12e and 1.2x FY13e ABV. Our target is
based on the two-stage DDM (CoE: 16.2%; beta: 1.3; Rf: 7.5%).
Risks are higher-than-expected credit cost and change in
management.
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